Case Study – Competition Analysis of a Proposed Supermarket Acquisition

Introduction

This case study evaluates whether a proposed acquisition of Tallowood Grocers Pty Ltd (Tallowood) by Kestrel Retail Group Ltd (Kestrel) would contravene s 50 of the Competition and Consumer Act 2010 (Cth). The parties and the transaction data are hypothetical and constructed for this unit; the framework, the legislation and the setting are Australian, and all amounts are in Australian dollars for the year ended 30 June 2025. The analysis follows the order the Australian Competition and Consumer Commission (ACCC) applies, from market definition and concentration through the substantial lessening of competition (SLC) test to remedies.

Transaction background and the parties

Kestrel is one of three national supermarket groups, operating 612 stores with Australian grocery turnover of $29.4 billion. Tallowood is a family-controlled chain of 34 full-line supermarkets in the Riverina, Murray and Central West regions of New South Wales and northern Victoria, with turnover of $1.06 billion, and it supplies 14 independent grocers through a small wholesale arm. Kestrel proposes to acquire the shares for $840 million, claiming synergies of $38 million a year from distribution and procurement.

Supermarket and grocery stores turn over approximately $12 billion each month nationally (ABS 2025), and the ACCC has found the sector concentrated by international standards, with local shopping patterns limiting the discipline national entry supplies (ACCC 2025b). Eleven of Tallowood’s stores sit in catchments where Kestrel already trades. Tallowood is profitable, and a wholesaler-backed bidder offered $795 million, so no failing firm argument arises. Under the merger reforms commencing 1 January 2026 (Treasury Laws Amendment (Mergers and Acquisitions Reform) Act 2024 (Cth)), the transaction must be notified and cannot complete until determined (Treasury 2024).

Market definition

The product dimension

Section 4E of the Competition and Consumer Act 2010 (Cth) defines a market to include goods substitutable for, or otherwise competitive with, those under consideration, the classic Australian formulation being a field of actual and potential transactions with close substitution: Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169. Definition is purposive, a frame for assessing effects (ACCC 2025a). The candidate market is the retail supply of packaged groceries and fresh food through full-line supermarkets. Butchers, greengrocers and bakeries constrain single categories but not the weekly one-stop shop, and convenience stores price a comparable basket 15 to 20 per cent higher. At a gross margin of 26 per cent, the critical loss for a 5 per cent price rise is:

Critical loss = 5 / (5 + 26) = 0.161, that is 16.1 per cent of unit sales.

Loyalty card evidence puts the predicted loss at approximately 9 per cent. Because that falls below the critical loss, a hypothetical monopolist could profitably raise price and the candidate market is a relevant one. Limited-assortment discounters are included only partially, their range of roughly 1,800 lines substituting for stock-up trips but not the full shop.

The geographic dimension and local catchments

Grocery competition is intensely local, because shoppers minimise travel time for a frequent, low-value purchase, so national shares conceal the competitive question (Smith & Round 2019). Each catchment is defined by a 15-minute drive-time isochrone, extended to 30 minutes for dispersed rural populations, and validated against loyalty card records showing 87 per cent of basket spend originates inside it. Populations come from Statistical Area Level 2 boundaries in the 2021 Census (ABS 2022), and online delivery is weak because the nearest fulfilment centre is 210 kilometres away. Five catchments, A to E, contain both a Kestrel and a Tallowood store; Catchment A, population 34,200 with sales of $150.0 million, is analysed in detail.

Market concentration

Table 1 sets out estimated sales and shares in Catchment A with the squared shares used in the Herfindahl-Hirschman Index (HHI).

Table 1: Estimated grocery sales, shares and concentration inputs, Catchment A, FY2025

The index is the sum of squared percentage shares:

HHI (pre) = 32.0² + 24.0² + 27.0² + 11.0² + 6.0² = 1,024 + 576 + 729 + 121 + 36 = 2,486

Combining the parties at 56.0 per cent gives:

HHI (post) = 56.0² + 27.0² + 11.0² + 6.0² = 3,136 + 729 + 121 + 36 = 4,022

Delta = 4,022 – 2,486 = 1,536, confirmed by the two-firm identity: delta = 2 x 32.0 x 24.0 = 1,536.

An index of 4,022 with an increase of 1,536 sits far above the indicative thresholds of 2,000 and 100 the ACCC uses to identify transactions warranting closer analysis. Table 2 applies the same computation across the overlap set: every catchment exceeds the screens, and in Catchments A, B and C only one other full-line chain would remain. The index remains a screen, silent on closeness of rivalry and on entry (ACCC 2025a; Corones 2015).

Table 2: Concentration in the five overlap catchments, pre and post merger

Populations from the 2021 Census (ABS 2022); shares from supplier scan data allocated by loyalty card records.

The substantial lessening of competition test

Section 50 prohibits an acquisition likely to have the effect of substantially lessening competition in any market. The 2024 reforms preserved that test and added that an acquisition creating, strengthening or entrenching a substantial degree of power in a market is treated as substantially lessening competition (Treasury 2024). The merger factors historically enumerated in s 50(3), among them barriers to entry, concentration, countervailing power, substitutes and the removal of a vigorous and effective competitor, continue to structure the assessment.

The test is comparative. As confirmed in Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297, competition with the acquisition is compared against the commercially realistic counterfactual without it, and the lessening must be likely in the sense of a real commercial likelihood. Here the counterfactual is continued independent operation or sale to the wholesaler-backed bidder, each preserving an independent competitor in every catchment. A lessening is substantial when meaningful and relevant to the competitive process, a threshold turning on durability rather than immediate magnitude (Corones 2015; Duke 2017). Figure 1 illustrates the sequence.

Unilateral effects

The unilateral theory is that the merged firm, no longer constrained by a close rival, profitably worsens its offer. Tallowood is the local price leader, its basket priced 3.1 per cent below Kestrel and its weekly 24-line discount program matched only in the overlap catchments. Assuming substitution proportional to share, diversion from Tallowood to Kestrel in Catchment A is:

Diversion ratio = 32.0 / (100 – 24.0) = 32.0 / 76.0 = 0.421, that is 42.1 per cent.

Exit surveys put actual diversion higher, at 47 per cent, consistent with the stores being nearest neighbours. Applying the gross upward pricing pressure index, with Kestrel’s margin of 26 per cent and a relative price of 1.031:

GUPPI = 0.421 x 0.26 x 1.031 = 0.113, that is 11.3 per cent.

That is more than double the 5 per cent level conventionally treated as material upward pricing pressure (Whish & Bailey 2021), though it assumes no repositioning by Ardent, no entry and no offsetting cost saving. One qualification matters locally: national chains set shelf prices nationally, so harm may surface not as a price rise but as range rationalisation, thinner promotions, shorter trading hours and slower refurbishment, the non-price deterioration the ACCC identifies as the expression of lost local rivalry (ACCC 2025b).

Coordinated effects

Coordination becomes more plausible as significant rivals fall away. In Catchments A to C the field reduces to the merged firm, one national rival and a discounter, with a 6 per cent independent fringe. The conditions are largely met: terms are easy to reach because ranges are symmetric and shelf prices public; deviation is easy to detect because catalogues appear weekly and scan data circulate through suppliers; and deviation can be punished by localised discounting (Whish & Bailey 2021). Removing Tallowood also removes the operator most likely to disrupt an accommodating equilibrium.

The theory nonetheless supports rather than founds the case. It is evidentially demanding, the discounter’s cost and range model gives it an incentive to deviate, and Australian courts have been reluctant to infer tacit coordination without evidence of the mechanism, as Metcash illustrates (Duke 2017).

Barriers to entry and countervailing power

Entry must be likely, timely and sufficient. A full-line supermarket in a regional centre requires roughly 3,200 square metres and turnover of about $28 million to cover fixed costs, so an entrant at minimum efficient scale would need:

Required share = 28.0 / 150.0 = 0.187, that is 18.7 per cent of catchment sales.

Capturing nearly one fifth of a catchment where the merged firm holds 56 per cent, against an incumbent able to respond locally, is implausible. Site scarcity compounds it: zoned land is limited, planning approval takes 18 to 30 months, fit-out is a sunk cost of $9 to $12 million per store, and exclusivity covenants in shopping centre leases impede entry (ACCC 2025b). Entry is neither likely nor timely, and the dividend associated with contestable retail markets cannot be assumed (Productivity Commission 2023).

Countervailing power is equally thin. Regional horticultural suppliers, several directing 18 per cent of output to Tallowood, would face a buyer holding 56 per cent of local demand, so the acquisition increases buyer power rather than constraining it, and the Food and Grocery Code of Conduct, mandatory since 2025, regulates conduct without answering the structural question (ACCC 2025b). The synergies read the same way: procurement terms extracted from suppliers are a transfer rather than an efficiency, and only verifiable savings likely to reach shoppers bear on the statutory test (King 2018). Table 3 consolidates the theories of harm.

Table 3: Theories of harm, supporting evidence and assessment

Remedies and undertakings

The ACCC prefers structural remedies because they restore structure without ongoing supervision, accepting behavioural commitments only where these are clear, durable and readily monitored (ACCC 2017); the scepticism about behavioural fixes in Australian Competition and Consumer Commission v Pacific National Pty Ltd (2020) 277 FCR 49 reinforces that preference. The remedy proposed is divestiture of seven stores, two in Catchment A, two in B and three in C, to an upfront buyer approved by the ACCC. Viability requires the regional distribution contract, a 24-month transitional supply agreement, transferable leases, and a purchaser able to replicate Tallowood’s constraint.

The remedy can be tested arithmetically. Assume the divested business retains 20.0 per cent of Catchment A sales rather than 24.0 per cent, the 4.0 points redistributed in proportion to existing shares: Kestrel gains 4.0 x 32/76 = 1.7 points to 33.7 per cent, Ardent 1.4 to 28.4, the discounter 0.6 to 11.6 and the independents 0.3 to 6.3 per cent. The index becomes:

HHI (post-remedy) = 33.7² + 28.4² + 20.0² + 11.6² + 6.3² = 1,136 + 807 + 400 + 135 + 40 = 2,518

The increase over the pre-merger index is 2,518 – 2,486 = 32, well below the indicative delta of 100. The vertical concern warrants a commitment to continue wholesale supply to the 14 independent grocers on non-discriminatory terms for five years, of the kind given under s 87B of the Competition and Consumer Act 2010 (Cth). If clearance were refused, Kestrel could seek a determination on public benefit grounds, reviewable on limited merits in the Australian Competition Tribunal, which weighed such benefits in Application by Sea Swift Pty Ltd [2016] ACompT 9; procurement transfers would be unlikely to qualify.

Conclusion

The acquisition would be likely to substantially lessen competition in Catchments A, B and C, where the merged firm would hold 44 to 56 per cent of sales, face a single full-line rival and absorb a price-aggressive competitor. The evidence is mutually reinforcing: post-merger concentration of 3,302 to 4,022 points, diversion approaching half of Tallowood’s custom, and upward pricing pressure of 11.3 per cent in the most concentrated catchment. Entry at minimum efficient scale would require 18.7 per cent of a catchment and is neither likely nor timely, and countervailing power is absent on both sides of the market. Catchment D is finely balanced; in Catchment E the discounter and a second independent operator make an SLC unlikely.

The recommended course is conditional clearance: divestiture of seven stores in Catchments A to C to an approved upfront buyer, restoring concentration to approximately its pre-merger level, with a five-year non-discriminatory wholesale supply commitment. Absent an acceptable package and a suitable purchaser, the transaction should be opposed. Two qualifications remain: the share estimates rest on scan data that understate cash-only independent trade, and the diversion figures would be strengthened by a larger exit survey and by natural experiments from store openings in comparable catchments.

References

Australian Bureau of Statistics 2022, Census of population and housing, 2021: general community profile, ABS, Canberra.

Australian Bureau of Statistics 2025, Retail trade, Australia, ABS, Canberra.

Australian Competition and Consumer Commission 2017, Merger remedy guidelines, ACCC, Canberra.

Australian Competition and Consumer Commission 2025a, Merger assessment guidelines, ACCC, Canberra.

Australian Competition and Consumer Commission 2025b, Supermarkets inquiry: final report, ACCC, Canberra.

Corones, SG 2015, Competition law in Australia, 6th edn, Thomson Reuters, Sydney.

Duke, A 2017, ‘Evidence and the substantial lessening of competition test in merger analysis’, Australian Business Law Review, vol. 45, no. 2, pp. 118-134.

King, SP 2018, ‘Merger policy in Australia: structure, evidence and reform’, Australian Economic Review, vol. 51, no. 3, pp. 380-390.

Productivity Commission 2023, Advancing prosperity: 5-year productivity inquiry report, Productivity Commission, Canberra.

Smith, R & Round, DK 2019, ‘Assessing competitive effects in Australian grocery retailing’, Economic Papers, vol. 38, no. 4, pp. 289-303.

Treasury 2024, Merger reform: final design, Australian Government Treasury, Canberra.

Whish, R & Bailey, D 2021, Competition law, 10th edn, Oxford University Press, Oxford.

Cases and legislation cited

Application by Sea Swift Pty Ltd [2016] ACompT 9; Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297; Australian Competition and Consumer Commission v Pacific National Pty Ltd (2020) 277 FCR 49; Re Queensland Co-operative Milling Association Ltd (1976) 25 FLR 169.

Competition and Consumer Act 2010 (Cth) ss 4E, 50, 87B; Treasury Laws Amendment (Mergers and Acquisitions Reform) Act 2024 (Cth).